Is China Ready to Buy Gold at Last?

(Do the math on this one!)

Silver Stock Report

by Jason Hommel, November 19, 2008


There has been a recent flurry of news articles saying China may begin to diversify into Gold.  But the articles conclude that China will move slowly, over years, so as to not disturb the markets.  Funny. 

It's funny because it's like they don't know basic math.

China wants 4000 tonnes of gold, to help "diversify" their $1.9 trillion in U.S. bonds.  It's quite a joke.  Please bear with me as I explain.

A tonne of gold is 32,151 ounces.  Please search "troy ounces per tonne" at google to confirm, because this one bit of information, and a simple calculator, can help you unlock and decipher the meaning of what you read in the news regarding the gold market, as gold at the national level is usually always quoted in terms of tonnes.

The total ounces China is seeking, is thus: 4000 tonnes x 32,151 ounces/tonne = 128,604,000, or 128.6 million ounces. 

That's an interesting number because it is about half of the U.S. official gold reserves of  261 million ounces.

It's also an interesting number because the total annual gold market consumption is said to be about 4000 tonnes, while annual mine production is only about 2500 tonnes.

But let's now multiply by the current gold price, to see how much of China's reserves could be diversified if they obtained that, without disturbing the price.

At $736/oz., times 128.6 million ounces = $94649.6 million, or $94.6 billion.

That's funny, because $94.6 billion is not very much of $1.9 trillion, which is $1900 billion. 

What's the percentage?  Simple:  $94.6 / $1900 x 100 = 5%.

See, if China diversified 5% of their reserves, they would dominate the world gold market, buying an equal amount bought by the rest of the world in a year, and that could crash the dollar by 50%, while gold prices could double!

And actually, such a diversification of $94 billion would be no diversification at all, since China has added $600 billion to their dollar holdings within the last 6-7 months, up from $1.3 trillion.

To truly diversify, they would need to sell more dollars than they are accumulating, so they really need to buy about $600 billion worth of gold, or more, in a year.

How much would a true diversification be at current prices?  $600 billion / $94 billion = 6.38 times as much gold as the world buys in a year.

Please think on that, and buy silver, instead.  Because as we have seen, as gold moves, silver moves higher faster, and runs out sooner, because it is more scarce.

Here is a quote that has been posted for over a year at my main page at silverstockreport.com:

"Even though the U.S. dollar is no longer backed by gold, any holder of dollars could wise up at any time and start buying silver or gold. China, for example, could spend their $1.3 (now $1.9) trillion U.S. dollars in bonds and buy gold anywhere in the world, such as Switzerland, Dubai, Tokyo.  China could even send agents to buy gold at any of the 4,000 or more coin shops in the U.S. The dollar could drop 50% or more overnight, and there's not a single thing the U.S. government, you or I could do about it."

Please note the following news items:

China Should Buy Gold for Reserves, Association Says (Update2)
Nov. 14 (Bloomberg)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aO8E.6_D2tVo&refer=home

China PBOC Mulls Raising Gold Reserve By 4,000 Tons - Report
Wed, Nov 19 2008
http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=82afe43d-8d3c-494d-894d-113c196ed750

"China's central bank is considering raising its gold reserve by 4,000 metric tons from 600 tons to diversify risks brought by the country's huge foreign exchange reserves, the Guangzhou Daily reported"

Two other quick news items:
Iran switches reserves to gold - report
TEHRAN, Nov 15
http://asia.news.yahoo.com/081115/3/3s594.html

Saudi Arabia buys $3.5bn of gold in two weeks
13 November 2008
http://news.goldseek.com/PeterCooper/1226586450.php

Finally, a news item regarding China's silver.

Silver hit by rising cost of production
10 Nov 2008
http://news.alibaba.com/article/detail/metalworking/100021066-1-silver-hit-rising-cost-production.html

Key excerpt:
"The country will increasingly rely on imports to fill the needs for silver, he said. Last year, the country's net imports were 1,067 tons, compared with net exports of 1,085 tons in 2006, according to customs data provided by Zhou."

Finally, it is keenly important to put the relation of gold and silver in perspective.

The world's consumption of gold, 4000 tonnes is $94 billion.

The world annual investor demand for silver is about 100 million ounces, or $1 billion.

Do you see why silver is the far superior investment to gold?  Silver will move higher much more easily, and you will make far more money in silver. 

The bulk and weight of silver now, are the reasons why some avoid it, and are the exact reasons why it will perform better than gold.  Fewer people take the "pain" to own it, thus, it is the more contrary investment, and will perform better.

Reminder:  10,000 ounces of silver are available at auction this Wednesday night, at http://www.seekbullion.com/

See also, smaller amounts of silver for sale daily at my Mom's silver shop at
www.seekbullion.com and even smaller amounts of silver for sale daily at
http://shop.ebay.com/merchant/jkesilver

Oh yes.  My mom also told me this week that she usually gets about $1 more per ounce at ebay than at seekbullion.com.  But that does not necessarily mean that seekbullion.com is cheaper, because it's not a perfectly fair comparison, since her auctions at seekbullion.com are usually over 100 oz., while at ebay, they are usually less. 

This same principle, China reporters seem to fail to understand.  When China moves, they will get less gold for the money, because when they move in size, they will move the market.  Communists really don't understand free market principles, as a matter of general principle.  But then again, neither do 99.9% of Americans, who prefer paper money, instead of real silver, and gold.





Sincerely,

    Jason Hommel

    In case you miss an email, check the archives:
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    You can buy silver in lots of 100-500 oz. at my auctions at www.seekbullion.com
    Auctions end M-Th, Sat, At 7PM Pacific, but you can place bids anytime, 24/7.  Wires only.  USA Shipping only. 

    You can also buy silver at www.momsilvershop.com
    Mom will ship overseas, and also in lots of more or less than 100 ounces.

    See us also at:
    Rocklin Coin Shop
    4870 Granite Drive, Rocklin, CA 95677
    http://rocklincoinshop.com/